Our CEO explains Cryptocurrencies – Part One

 

Some of you may be very familiar with Cryptos either as traders, possibly miners, or simply as a topic of interest so some of this information may be familiar to you. I will note, at this point, that the views expressed on this topic, other than the technical descriptions, are my own. Feel free to disagree, I am open to debate on the topic. I think most of us are familiar with the reasons Cryptos were invented, with Bitcoin being the pioneer in this space.

 

I will reiterate for completeness:

Satoshi Nakamoto, the mysterious and still unknown creator of Bitcoin had a vision for a democratized virtual currency not controlled by any individual, government, or international body. The decentralized nature of a Crypto is aimed to address his view, which is shared by many, that international financial markets are manipulated by a few governments and large institutions. The old saying: “he who has the gold makes the rules” is essentially what this is aimed to combat. The truth is more complicated than this oversimplification but not too far off the mark.

 

Ironically this was demonstrated by the recent manipulation of Bitcoin by Elon Musk which shows that Cryptos are not immune to this age-old reality. For those that don’t know the story, it goes something like this: Elon Musk announced that Tesla and by inference he, is a believer in Bitcoin and had invested $1,5bn in Bitcoin. This was viewed by many as an endorsement by one of the world’s smartest individuals of Bitcoin and Cryptos in general. The truth is somewhat different but talks to the smarts of Musk but also a major flaw in the Crypto market. Musk realised that his endorsement of Bitcoin through such a large purchase would make the price run higher, which it did. He could then sell the Bitcoin into this wave of demand, do so anonymously and pocket the profit. The result was $1bn of profit for Tesla. So, what is wrong with this picture:

 

  • This is market manipulation for profit: which in traditional financial markets would have landed Musk in prison. Making statements as he did and then selling into the strength is considered a fraud; and
  • The anonymity of his purchasing and sales removes the transparency of traditional financial markets which would make such a move obvious to the investment community and eliminate the possibility of such a profit i.e., a large purchase like $1,5bn would be known and push up the price of a traditional stock while the buying was happening. Similarly, a large sale after the purchase would be transparent and the stock would fall massively as a result of the sell-off – the net effect would likely be a loss or no profit at all.

 

This is just the initial introduction to Cryptos and why they exist and that their role in the world economy still needs to be fully realised. I believe that in a similar fashion to the early years of the internet, a range of Cryptos will emerge that add real value to the world. I am not convinced that there are any yet, although I don’t have detailed knowledge of all of them as there is a myriad of Cryptos that have been launched and continue to be launched through ICOs. My fundamental issue with all of those out there, that I have looked at, is that currently, they are net consumers of value. What I mean by this is that none have yet to demonstrate real value that exceeds the resources they consume with one exception which is XRP on the Ripple network (my view is this isn’t actually a Crypto at all, a topic for another day).

 

The extreme volatility in the market, in my view, is testimony to this and is large because:

– It is currently impossible to value any of the Cryptos intrinsically – a similar problem that existed at the start of the .com era. No one understood how money was going to be made so values were all over the show;

 

  • Getting on the bandwagon is easy. Far easier than opening brokerage accounts so the casual investor seeing their mates make crazy money are attracted to it and sign up easily. It is a feeding frenzy and the stories of people making stupid money abound: greed is powerful. I remember this parallel in the late 1990s like it was yesterday. When gym trainers and dentists are giving investing advice just know it’s a bubble. It doesn’t mean there won’t be overall winners but know what you are getting into. It can all collapse overnight.

 

The follow-up segment will focus on the different types of cryptos, particularly how they are created (mined) with some examples of each.